UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Nine Months Ended August 1, 2004
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to____________________
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-5658129
-------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 LEXINGTON AVENUE, NEW YORK, NEW YORK 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes __X__ No____
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes __X__ No____
The number of shares of the Registrant's common stock, $.10 par value,
outstanding as of September 10, 2004 was 15,242,905.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Nine Months and Three Months Ended August 1, 2004 and August 3, 2003 3
Condensed Consolidated Balance Sheets -
August 1, 2004 and November 2, 2003 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 1, 2004 and August 3, 2003 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
PART II - OTHER INFORMATION
Item 6. Exhibits 47
SIGNATURE 47
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
------------------------- -------------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
----------- ---------- ----------- ----------
(In thousands, except per share data)
NET SALES $ 1,390,655 $ 1,171,099 $ 500,732 $ 415,158
COST AND EXPENSES:
Cost of sales 1,290,650 1,099,798 456,993 384,774
Selling and administrative 57,640 53,179 20,564 19,457
Depreciation and amortization 18,832 17,753 6,462 6,117
----------- ----------- ----------- -----------
1,367,122 1,170,730 484,019 410,348
----------- ----------- ----------- -----------
OPERATING PROFIT 23,533 369 16,713 4,810
OTHER INCOME (EXPENSE):
Interest income 684 615 253 135
Other expense - net--Note B (3,065) (2,418) (1,205) (947)
Foreign exchange loss - net--Note J (98) (274) (28) (184)
Interest expense (1,321) (1,678) (441) (480)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes 19,733 (3,386) 15,292 3,334
Income tax (provision) benefit (7,764) 1,262 (6,053) (1,223)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 11,969 (2,124) 9,239 2,111
Discontinued operations-
sale of real estate, net of taxes--Note H 9,520 -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 21,489 ($ 2,124) $ 9,239 $ 2,111
=========== =========== =========== ===========
PER SHARE DATA
Basic:
Income (loss) from continuing operations per share $ 0.79 ($ 0.14) $ 0.61 $ 0.14
Discontinued operations-sale of real estate per share 0.62 -- -- --
----------- ----------- ----------- -----------
Net income (loss) per share $ 1.41 ($ 0.14) $ 0.61 $ 0.14
=========== =========== =========== ===========
Weighted average number of shares-basic--Note G 15,226 15,217 15,233 15,218
=========== =========== =========== ===========
Diluted:
Income (loss) from continuing operations per share $ 0.78 ($ 0.14) $ 0.60 $ 0.14
Discontinued operations-sale of real estate per share 0.62 -- -- --
----------- ----------- ----------- -----------
Net income (loss) per share $ 1.40 ($ 0.14) $ 0.60 $ 0.14
=========== =========== =========== ===========
Weighted average number of shares-diluted--Note G 15,342 15,217 15,399 15,226
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 1, November 2,
2004 2003 (a)
--------- -------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $34,472 (2004) and $18,870
(2003)--Note J $ 68,736 $ 62,057
Short-term investments 4,187 4,149
Trade accounts receivable less allowances of $8,843 (2004) and $10,498 (2003)
--Note B 378,368 313,946
Inventories--Note C 31,904 37,357
Recoverable income taxes -- 2,596
Deferred income taxes 8,705 8,722
Prepaid expenses and other assets 15,654 16,132
--------- ---------
TOTAL CURRENT ASSETS 507,554 444,959
Investment in securities 159 193
Property, plant and equipment-net--Notes E and H 83,400 82,452
Deposits and other assets 2,542 2,107
Intangible assets-net of accumulated amortization of $994 (2004) and
$1,349 (2003)--Note K 9,355 8,982
--------- ---------
TOTAL ASSETS $ 603,010 $ 538,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks--Note D $ 7,717 $ 4,062
Current portion of long-term debt--Note E 394 371
Accounts payable 170,329 153,979
Accrued wages and commissions 49,731 45,834
Accrued taxes other than income taxes 17,859 16,741
Other accruals 23,938 14,673
Deferred income and other liabilities 35,122 27,665
Income taxes payable 5,424 --
--------- ---------
TOTAL CURRENT LIABILITIES 310,514 263,325
Accrued insurance--Note L 4,012 4,098
Long-term debt--Note E 13,799 14,098
Deferred income taxes 10,770 15,252
STOCKHOLDERS' EQUITY--Notes B, D and F
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none Common stock, par value $.10; Authorized--30,000,000 shares;
issued--15,242,905 shares (2004) and 15,220,415 shares (2003) 1,524 1,522
Paid-in capital 41,597 41,091
Retained earnings 221,212 199,723
Accumulated other comprehensive loss (418) (416)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 263,915 241,920
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 603,010 $ 538,693
========= =========
(a) The balance sheet at November 2, 2003 has been derived from the audited
financial statements at that date.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
----------------------
August 1, August 3,
2004 2003
---------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net income (loss) $ 21,489 ($ 2,124)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Income from discontinued operations-sale of real estate (9,520) --
Depreciation and amortization 18,832 17,753
Accounts receivable provisions 3,809 4,262
Gain on foreign currency translation (13) 14
Deferred income tax benefit (4,459) (1,703)
(Gain) loss on disposition of fixed assets (200) 136
Other -- 2
Changes in operating assets and liabilities:
Increase in accounts receivable (57,439) (11,807)
(Reduction) increase in securitization of accounts receivable (10,000) 10,000
Decrease (increase) in inventories 5,453 (3,150)
Decrease (increase) in prepaid expenses and other current assets 787 (656)
(Increase) decrease in other assets (435) 820
Increase (decrease) in accounts payable 15,589 (870)
Increase in accrued expenses 13,909 6,448
Increase in deferred income and other liabilities 6,863 10,978
Increase (decrease) in income taxes payable 3,424 (1,375)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,089 28,728
-------- --------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Nine Months Ended
--------------------
August 1, August 3,
2004 2003
----------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $ 1,183 $ 651
Purchases of investments (1,145) (621)
Proceeds from disposals of property, plant and equipment 674 271
Proceeds from sale of real estate (discontinued operations) 18,500 --
Purchases of property, plant and equipment (24,278) (13,486)
Acquisitions (385) --
Other -- 20
-------- --------
NET CASH APPLIED TO INVESTING ACTIVITIES (5,451) (13,165)
-------- --------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (276) (1,437)
Exercise of stock options 508 55
Increase in notes payable to bank 3,479 935
-------- --------
NET CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 3,711 (447)
-------- --------
Effect of exchange rate changes on cash 330 (318)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,679 14,798
Cash and cash equivalents, including restricted cash, beginning of period 62,057 43,620
-------- --------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH
END OF PERIOD $ 68,736 $ 58,418
======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 1,279 $ 1,737
Income taxes $ 8,874 $ 1,932
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at August 1, 2004 and consolidated
results of operations for the nine and three months ended August 1, 2004 and
August 3, 2003 and consolidated cash flows for the nine months ended August 1,
2004 and August 3, 2003. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the fiscal year.
The Company has elected to follow APB Opinion 25, "Accounting for Stock Issued
to Employees," to account for its Non-Qualified Stock Option Plan under which no
compensation cost is recognized because the option exercise price is equal to at
least the market price of the underlying stock on the date of grant. Had
compensation cost for these plans been determined at the grant dates for awards
under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
Nine Months Ended Three Months Ended
-------------------- -------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
-------- ------- --------- --------
(Dollars in thousands, except per share data)
Net income (loss) as reported $ 21,489 ($ 2,124) $ 9,239 $ 2,111
Pro forma compensation expense, net of taxes (97) (148) (26) (51)
-------- -------- -------- --------
Pro forma net income (loss) $ 21,392 ($ 2,272) $ 9,213 $ 2,060
======== ======== ======== ========
Pro forma net income (loss) per share
Basic $ 1.40 ($ 0.15) $ 0.60 $ 0.14
======== ======== ======== ========
Diluted $ 1.39 ($ 0.15) $ 0.60 $ 0.14
======== ======== ======== ========
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in fiscal 2004 and 2003, respectively: risk-free
interest rates of 4.5% and 2.0%, respectively; expected volatility of .51 and
..50, respectively; an expected life of the options of five years; and no
dividends. The weighted average fair value of stock options granted during
fiscal years 2004 and 2003 were $17.50 and $5.93, respectively.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended November 2, 2003. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program ("Securitization Program"). In April
2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under the Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries are sold from time-to-time by the
Company to Volt Funding Corp., a wholly owned special purpose subsidiary of the
Company ("Volt Funding"). Volt Funding, in turn, sells to Three Rivers Funding
Corporation ("TRFCO"), an asset backed commercial paper conduit sponsored by
Mellon Bank, N.A. and unaffiliated with the Company, an undivided percentage
ownership interest in the pool of receivables Volt Funding acquires from the
Company (subject to a maximum purchase by TRFCO in the aggregate of $150.0
million). The Company retains the servicing responsibility for the accounts
receivable. At August 1, 2004, TRFCO had purchased from Volt Funding a
participation interest of $60.0 million out of a pool of approximately $229.5
million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts on
TRFCO's commercial paper, are charged to the consolidated statement of
operations.
The Company incurred charges, related to the Securitization Program, of $1.3
million and $0.4 million in the nine and three months ended August 1, 2004,
respectively, compared to $1.2 million and $0.4 million in the nine and three
months ended August 3, 2003, which are included in Other Expense on the
condensed consolidated statement of operations. The equivalent cost of funds in
the Securitization Program was 2.7% and 2.6% per annum in the nine-month 2004
and 2003 fiscal periods, respectively. The Company's carrying retained interest
in the receivables approximated fair value due to the relatively short-term
nature of the receivable collection period. In addition, the Company performs
sensitivity analyses, changing various key assumptions, which also indicate the
retained interest in receivables approximated fair value.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program--Continued
At August 1, 2004 and November 2, 2003, the Company's carrying retained interest
in a revolving pool of receivables of approximately $229.5 million and $189.3
million, respectively, net of a service fee liability, was approximately $169.1
million and $119.0 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $60.0 million and $70.0 million at August
1, 2004 and November 2, 2003, respectively. Accordingly, the trade accounts
receivable included on the August 1, 2004 and November 2, 2003 condensed
consolidated balance sheets have been reduced to reflect the participation
interest sold of $60.0 million and $70.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof from a nationally
recognized rating organization. At August 1, 2004, the Company was in compliance
with all requirements of the Securitization Program and believes it will remain
in compliance throughout the remainder of the fiscal year.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
August 1, November 2,
2004 2003
------- -------
(In thousands)
Staffing Services $ 38
Telephone Directory 12,308 $12,898
Telecommunications Services 16,316 18,320
Computer Systems 3,242 6,139
------- -------
Total $31,904 $37,357
======= =======
The cumulative amounts billed under service contracts at August 1, 2004 and
November 2, 2003 of $7.8 million and $3.6 million, respectively, are credited
against the related costs in inventory.
Note D--Short-Term Borrowings
In April 2004, the Company amended its $40.0 million, secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days (to now expire in
April 2005) and reduce the line to $30.0 million, as a result of the increase in
its Securitization Program (see Note B). Additionally, in July 2004, this
program was further amended to release Volt Delta Resources, LLC as a guarantor
and collateral grantor under the Credit Agreement due to the previously
announced agreement between Volt Delta Resources, LLC and Nortel Networks, Inc.
(see Note M). At August 1, 2004, the Company had credit lines with domestic and
foreign banks which provided for borrowings and letters of credit up to an
aggregate of $41.5 million, including $30.0 million under the Credit Agreement.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note D--Short-Term Borrowings--Continued
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent arranger for the secured
Credit Facility is JP Morgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, NA, Wells Fargo, N. A. and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
August 1, 2004, $26.6 million was available under the borrowing base. Borrowings
under the Credit Facility are to bear interest at various rate options selected
by the Company at the time of each borrowing. Certain rate options, together
with a facility fee, are based on a leverage ratio, as defined. Additionally,
interest and the facility fees can be increased or decreased upon a change in
the Company's long-term debt rating provided by a nationally recognized rating
agency. Based upon the Company's leverage ratio and debt rating at August 1,
2004, if a three-month LIBO rate was the interest rate option selected by the
Company, borrowings would have borne interest at the rate of 2.3% per annum. At
August 1, 2004, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million; a
limitation on cash dividends, capital stock repurchases and redemptions by the
Company in any one fiscal year to 50% of consolidated net income, as defined,
for the prior fiscal year; and a requirement that the Company maintain a ratio
of EBIT, as defined, to interest expense, as defined, of 1.25 to 1.0 for the
twelve months ending as of the last day of each fiscal quarter. The Credit
Agreement also imposes limitations on, among other things, the incurrence of
additional indebtedness, the incurrence of additional liens, sales of assets,
the level of annual capital expenditures, and the amount of investments,
including business acquisitions and investments in joint ventures, and loans
that may be made by the Company and its subsidiaries. At August 1, 2004, the
Company was in compliance with all covenants in the Credit Agreement and
believes it will be in compliance throughout the remainder of the fiscal year.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are now guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At August 1, 2004, four of those guarantors have pledged approximately
$49.3 million of accounts receivable, other than those in the Securitization
Program, as collateral for the guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility.
At August 1, 2004, the Company had total outstanding foreign currency bank
borrowings of $7.7 million, $3.6 million of which were under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note E--Long-Term Debt
Long-term debt consists of the following:
August 1, November 2,
2004 2003
------- --------
(In thousands)
Term loan (a) $14,193 $14,469
Less amounts due within one year 394 371
------- -------
Total long-term debt $13,799 $14,098
======= =======
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $14.2 million at
August 1, 2004. The 20-year loan, which bears interest at 8.2% per annum
and requires principal and interest payments of $0.4 million per quarter,
is secured by a deed of trust on certain land and buildings that had a
carrying amount at August 1, 2004 of $10.7 million. The obligation is
guaranteed by the Company.
Note F--Stockholders' Equity
Changes in the major components of stockholders' equity for the nine months
ended August 1, 2004 are as follows:
Common Paid-in Retained
Stock Capital Earnings
-------- -------- --------
(In Thousands)
Balance at November 2, 2003 $ 1,522 $ 41,091 $199,723
Stock options exercised - 22,490 shares 2 506
Net income for the nine months -- -- 21,489
-------- -------- --------
Balance at August 1, 2004 $ 1,524 $ 41,597 $221,212
======== ======== ========
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $490,000 and $508,000 at August 1, 2004 and November 2, 2003,
respectively, and an unrealized gain, net of taxes, of $72,000 and $92,000 in
marketable securities at August 1, 2004 and November 2, 2003, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Nine Months Ended Three Months Ended
-------------------- --------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
------- -------- --------- --------
(In thousands)
Net income (loss) $ 21,489 ($ 2,124) $ 9,239 $ 2,111
Foreign currency translation adjustments-net 18 141 99 39
Unrealized gain on marketable securities-net (20) 53 (22) 46
-------- -------- -------- --------
Total comprehensive income (loss) $ 21,487 ($ 1,930) $ 9,316 $ 2,196
======== ======== ======== ========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Nine Months Ended Three Months Ended
----------------------- -----------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
---------- ---------- --------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 15,225,936 15,217,448 15,232,638 15,217,514
Effect of dilutive securities:
Employee stock options 115,743 -- 166,072 8,012
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,341,679 15,217,448 15,398,710 15,225,526
========== ========== ========== ==========
Options to purchase 49,400 and 549,829 shares of the Company's common stock were
outstanding at August 1, 2004 and August 3, 2003, respectively but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
Note H--Discontinued Operations
In March 2004, the Company sold real estate, previously leased by the Company to
its former 59% owned subsidiary, Autologic Information International, Inc.,
which interest was sold in November 2001. The cash transaction resulted in a
$9.5 million gain, net of taxes of $4.6 million.
Note I--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the nine and three months ended
August 1, 2004 and August 3, 2003, included on page 26 of this Report, is an
integral part of these condensed consolidated financial statements.
During the nine months ended August 1, 2004, consolidated assets increased by
$64.3 million, primarily due to an increase in receivables of the Staffing
Services segment and a reduction in the use of Company's Securitization Program
as well as capital expenditures by the Computer Services segment.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note J--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At August 1, 2004, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
equivalent to $4.4 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52.
Included in cash and cash equivalents at August 1, 2004 and November 2, 2003
were approximately $34.5 million and $18.9 million, respectively, restricted to
cover obligations that were reflected in accounts payable at such dates. These
amounts primarily relate to certain contracts with customers in which the
Company manages the customers' alternative staffing requirements, including the
payment of associate vendors.
Note K--Goodwill
Goodwill and other intangibles with indefinite lives are no longer amortized,
but are subject to annual testing using fair value methodology. An impairment
charge is recognized for the amount, if any, by which the carrying value of an
intangible asset exceeds its fair value. In the second quarter of fiscal 2002,
the Company engaged independent valuation firms and since then, on an annual
basis, has used Company personnel to perform such testing. The testing primarily
uses comparable multiples of sales and EBITDA and other valuation methods to
assist the Company in the determination of the fair value of the reporting units
measured.
Using the same valuation methods employed as in prior years, the Company
completed its annual impairment tests on the remaining $9.0 million of goodwill
during the second quarter of fiscal 2004 and determined that no impairment
existed, since its fair value exceeded the carrying value.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors.
The insurance policies have various premium rating plans that establish the
ultimate premium to be paid. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premium will be made based upon the level of claims incurred at a future date up
to three years after the end of the respective policy period. For the policy
year ended March 31, 2003, a maximum premium has been predetermined and accrued.
At August 1, 2004 and November 2, 2003, the Company's prepayment or (liability)
for each of the outstanding policy years was as follows:
August 1, November 2,
2004 2003
------- -------
(In thousands)
Policy year ended March 31, 2003 ($4,289) ($4,288)
Policy year ended March 31, 2004 (4,339) 2,526
Policy year ended March 31, 2005 2,896 --
------- -------
($5,732) ($1,762)
======= =======
Balance Sheet Classification:
Prepaid Insurance $ 2,896 $ 2,526
Accrued Insurance - Current (4,616) (190)
Accrued Insurance - Long-term (4,012) (4,098)
------- -------
($5,732) ($1,762)
======= =======
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note M--Subsequent Event
On August 2, 2004, Volt Delta Resources, LLC ("VoltDelta"), a wholly-owned
subsidiary of the Company, closed a Contribution Agreement (the "Contribution
Agreement") signed with Nortel Networks, Inc. ("Nortel Networks") on June 11,
2004 under which Nortel Networks contributed certain of the assets (consisting
principally of customer base and contracts, intellectual property and inventory)
and certain specified liabilities of its directory and operator services ("DOS")
business to VoltDelta in exchange for a 24% minority equity interest in
VoltDelta. Together with its subsidiaries, VoltDelta is reported as the
Company's Computer Systems Segment. VoltDelta plans to use the assets acquired
from Nortel Networks to enhance the operation of its DOS business. The
acquisition will allow VoltDelta to provide the newly combined customer base
with new solutions, an expanded suite of products, content and enhanced
services.
In addition, the companies entered into a ten year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks Traffic Operator Position System (TOPS) switching platform and
VoltDelta's IWS/MWS operator workstations and associated products. Nortel
Networks and VoltDelta will work together developing feature content and release
schedules for, and to ensure compatibility between, any TOPS changes that
require a change in VoltDelta's products or workstations.
Also on August 2, 2004, the Company and certain subsidiaries entered into a
Member's Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of VoltDelta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that commencing two years
from the date thereof Nortel Networks may exercise a put option or VoltDelta may
exercise a call option, in each case to effect the purchase by VoltDelta of
Nortel Networks' minority equity interest in VoltDelta. If either party
exercises its option between the second and third year from the date of the
Members' Agreement, the price paid to Nortel Networks for its 24% minority
equity interest will be the product of the revenue of Volt Delta for the twelve
month period ended as of the fiscal quarter immediately preceding the date of
option exercise (the "VoltDelta Revenue Base") multiplied by 70% of the
enterprise market value to revenue formula index of specified comparable
companies (which index shall not exceed 1.8), times Nortel Networks' ownership
interest in VoltDelta (the amount so calculated would not exceed 30% of the
VoltDelta Revenue Base), with a minimum payment of $25.0 million and a maximum
payment of $70.0 million. If the option is exercised after three years from the
date of the Members' Agreement, the price paid will be a mutually agreed upon
amount.
The Company has engaged an independent valuation firm to assist in the
determination of the purchase price (the value of the 24% equity interest in
VoltDelta) of the acquisition and its allocation, which is expected to be
completed in the fourth quarter of fiscal 2004.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS DISCLOSURE
This report and other reports and statements issued by the Company and its
officers from time-to-time contain certain "forward-looking statements." Words
such as "may," "should," "could," "seek," "believe," "expect," "anticipate,"
"estimate," "project," "intend," "strategy," "likely," and similar expressions
are intended to identify forward-looking statements about the Company's future
plans, objectives, performance, intentions and expectations. These
forward-looking statements are subject to a number of known and unknown risks
and uncertainties including, but are not limited to, those set forth below under
"Factors That May Affect Future Results," as well as the following:
o variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
shortages, which could affect the Company's ability to meet its customers'
demands and the Company's profit margins;
o the adverse effect of customers and potential customers moving
manufacturing and servicing operations off-shore, reducing their need for
temporary workers;
o the ability of the Company to diversify its available temporary personnel
to offer greater support to the service sector of the economy;
o changes in customers' attitudes toward the use of outsourcing and temporary
personnel;
o intense price competition and pressure on margins;
o reduced level of capital spending by the Company's telecommunications
customers;
o lower renewal rates of customers contracts and rates and markups lower than
previously obtained;
o the Company's ability to meet competition in its highly competitive markets
with minimal impact on margins;
o the Company's ability to foresee changes and to identify, develop and
commercialize innovative and competitive products and systems in a timely
and cost effective manner;
o the Company's ability to achieve customer acceptance of its products and
systems in markets characterized by rapidly changing technology and
frequent new product introductions;
o risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance;
o the timing of customer acceptances of systems;
o the Company's dependence on third parties for some product components;
o the Company's ability to successfully integrate the acquisition by the
Computer Systems segment;
o the degree and effects of inclement weather; and
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FORWARD-LOOKING STATEMENTS DISCLOSURE--Continued
o the Company's ability to maintain a sufficient credit rating to enable it
to continue its Securitization Program and ability to maintain its existing
credit rating in order to avoid any increase in interest rates and any
increase in fees under the Credit Agreement, as well as to comply with the
financial and other covenants applicable under the Credit Agreement and
other borrowing instruments.
Such risks and uncertainties could cause the Company's actual results,
performance and achievements to differ materially from those described in or
implied by the forward-looking statements. Accordingly, readers should not place
undue reliance on any forward-looking statements made by or on behalf of the
Company. The Company does not assume any obligation to update any
forward-looking statements after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF WEAKENED UNITED STATES AND EUROPEAN
ECONOMIES.
The demand for the Company's services in all segments is dependent upon economic
conditions. Accordingly, the Company's business tends to suffer during economic
downturns. The Company's business is dependent upon the continued financial
strength of its customers. Certain of the Company's customers have announced
layoffs, unfavorable financial results, investigations by government agencies
and lowered financial expectations for the near term. Customers that experience
any of these events are less likely to use the Company's services.
In the staffing services segment, a weakened economy or a material increase in
productivity results in decreased demand for temporary and permanent personnel.
As economic activity slows down, many of the Company's customers reduce their
use of temporary employees before they reduce the number of their regular
employees. There is less need for contingent workers at all potential customers,
who are less inclined to add to their costs. Since employees are reluctant to
risk changing employers, there are fewer openings and reduced activity in
permanent placements as well. The segment has also experienced margin erosion
caused by increased competition, electronic auctions and customers leveraging
their buying power by consolidating the number of vendors with whom they deal.
Customer use of the Company's telecommunications services is similarly affected
in that some of the Company's customers reduce their use of outside services in
order to provide work to their in-house departments and, in the aggregate,
because of the current downturn in the telecommunications industry and continued
overcapacity, there is less available work. The reduction in telecommunications
companies' capital expenditure projects has significantly reduced the segment's
sales and minimal improvement can be expected until the industry begins to
increase its capital expenditures.
Additionally, the degree and timing of obtaining new contracts and the rate of
renewals of existing contracts, as well as customers' degree of utilization of
the Company's services, could adversely affect the Company's businesses.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FACTORS THAT MAY AFFECT FUTURE RESULTS--Continued
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. In
addition, many of the segments' long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the segment
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS SUBJECTS IT TO EMPLOYMENT-RELATED
CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the workplace is limited, and the Company risks incurring liability to
its employees for injury or other harm that they suffer at the customer's
workplace.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that result in harm to the Company's
customers. Such actions may be the result of negligence or misconduct on the
part of the Company's employees.
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, insurance is not available or not available on
acceptable terms for some risks and there can be no assurance that the Company's
insurance will cover future actions or that the Company will continue to be able
to obtain such insurance on acceptable terms, if at all.
POSSIBLE NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.
The Company's businesses are subject to licensing in many states and licensing
and regulation in certain foreign jurisdictions. Although the Company has not
had any difficulty complying with these requirements in the past, there can be
no assurance that the Company will continue to be able to do so, or that the
cost of compliance will not become material. Additionally, the jurisdictions in
which we do or intend to do business may:
o create new or additional regulations that prohibit or restrict the types of
services that we currently provide;
o impose new or additional employee benefit requirements, thereby increasing
costs that could adversely impact the Company's ability to conduct its
business;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes or enact new or different taxes payable by the providers of
services such as those offered by the Company, some of which may not be
able to be passed on to customers.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FACTORS THAT MAY AFFECT FUTURE RESULTS--Continued
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult to hire
such personnel in the face of competition from other companies in different
industries who are capable of offering higher compensation.
ALL OF THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE,
WHICH COULD ADVERSELY AFFECT THE RESULTS OF THOSE BUSINESSES.
The Company operates in very competitive industries with, in many cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than Volt. Accordingly, these
competitors may be better able than Volt to attract and retain qualified
personnel and may be able to offer their customers more favorable pricing terms
than the Company. In many businesses, small competitors can offer similar
services at lower prices because of lower overheads. In addition to these
general statements, the following information applies to the specific segments
identified.
The Company's staffing services segment is in a very competitive industry with
limited barriers to entry. There are many temporary service firms in the United
States and Europe, many with only one or a few offices that service only a small
market. On the other hand, some of this segment's principal competitors are
larger and have substantially greater financial resources than Volt and service
the national accounts whose business the Company solicits. Accordingly, these
competitors may be better able than Volt to attract and retain qualified
personnel and may be able to offer their customers more favorable pricing terms
than the Company. Furthermore, all of the staffing industry is subject to the
fact that contingent workers are provided to customers and most customers are
more protective of their full time workforce than of contingent workers.
The results of the Company's computer systems segment are highly dependent on
the volume of directory assistance calls to VoltDelta's customers which are
routed to the segment under existing contracts, the segment's ability to
continue to secure comprehensive listings from others at acceptable pricing, its
ability to obtain additional customers for these services and on its continued
ability to sell products and services to new and existing customers. The volume
of directory assistance calls to VoltDelta's customers is subject to reduction,
as customers utilize listings offered on the internet. This segment's position
in its market depends largely upon its reputation, quality of service and
ability to develop, maintain and implement information systems on a cost
competitive basis. Although Volt continues its investment in research and
development, there is no assurance that this segment's present or future
products will be competitive, that the segment will continue to develop new
products or that present products or new products can be successfully marketed.
The Company's telecommunications services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. Some of this
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FACTORS THAT MAY AFFECT FUTURE RESULTS--Continued
segment's significant competitors are larger and have substantially greater
financial resources than Volt. There are relatively few significant barriers to
entry into certain of the markets in which the segment operates, and many
competitors are small, local companies that generally have lower overhead.
Volt's ability to compete in this segment depends upon its reputation, technical
capabilities, pricing, quality of service and ability to meet customer
requirements in a timely manner. Volt believes that its competitive position in
this segment is augmented by its ability to draw upon the expertise and
resources of other Volt segments.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o while the Company's stock is traded on the New York Stock Exchange, there
is limited float, and a relatively low average daily trading volume;
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product announcements
or acquisitions;
o regulatory developments;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to our
performance.
The stock market has recently experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against us, we would incur substantial
legal fees and our management's attention and resources would be diverted from
operating our business in order to respond to the litigation.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FACTORS THAT MAY AFFECT FUTURE RESULTS--Continued
THE COMPANY'S PRINCIPAL STOCKHOLDERS AND MEMBERS OF THEIR FAMILIES OWN A
SIGNIFICANT PERCENTAGE OF THE COMPANY AND WILL BE ABLE TO EXERCISE SIGNIFICANT
INFLUENCE OVER THE COMPANY AND THEIR INTERESTS MAY DIFFER FROM THOSE OF OTHER
STOCKHOLDERS.
As of August 1, 2004, the Company's principal officers controlled approximately
47% of the Company's outstanding common stock. Accordingly, these stockholders
are able to control the composition of the Company's board of directors and many
other matters requiring shareholder approval and will continue to have
significant influence over the Company's affairs. This concentration of
ownership also could have the effect of delaying or preventing a change in
control of the Company or otherwise discouraging a potential acquirer from
attempting to obtain control of the Company.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), entitled "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: In the first nine months of fiscal 2004, this revenue comprised
approximately 77% of net consolidated sales. Sales are derived from the
Company's Staffing Solutions Group supplying its own temporary personnel to
its customers, for which the Company assumes the risk of acceptability of
its employees to its customers, and has credit risk for collecting its
billings after it has paid its employees. The Company reflects revenues for
these services on a gross basis in the period the services are rendered.
Managed Services: In the first nine months of fiscal 2004, this revenue
comprised approximately 2% of net consolidated sales. Sales are generated by
the Company's E-Procurement Solutions' subsidiary, ProcureStaff, and for
certain contracts, sales are generated by the Company's Staffing Solutions
Group's managed services operations. The Company receives an administrative
fee for arranging, invoicing and collecting the revenue related to other
staffing companies ("associate vendors") who have supplied personnel to the
Company's customers. The administrative fee is either charged to the
customer or subtracted from the Company payment to the associate vendor. The
customer is typically responsible for assessing the work of the associate
vendor, who has responsibility for the acceptability of its personnel to the
customer, and in most instances the customer and associate vendor have
agreed to the Company not paying the associate vendor until the customer
pays the
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
CRITICAL ACCOUNTING POLICIES--Continued
Company. Based upon the revenue recognition principles prescribed in
Emerging Issues Task Force 99-19 ("EITF 99-19"), entitled "Reporting Revenue
Gross as a Principal versus Net as an Agent", revenue for these services,
where the customer and the associate vendor have agreed to this arrangement,
is recognized net of associated costs in the period the services are
rendered.
Outsourced Projects: In the first nine months of fiscal 2004, this revenue
comprised approximately 6% of net consolidated sales. Sales are derived from
the Company's Information Technology Solutions operation providing outsource
services for a customer in the form of project work, for which the Company
is responsible for deliverables. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
services are rendered, and when the Company is responsible for project
completion, revenue is recognized when the project is complete and the
customer has approved the work.
Shaw & Shaw: In the first nine months of fiscal 2004, this revenue comprised
less than 1% of net consolidated sales, due to the Company's reporting of
these revenues on a net basis. Sales are generated by the Company's Shaw &
Shaw subsidiary, for which the Company provides professional employer
organizational services ("PEO") to certain customers. Generally, the
customers transfer their entire workforce or employees of specific
departments or divisions to the Company, but the customers maintain control
over the day-to-day job duties of the employees. Based upon the revenue
recognition principles prescribed in EITF 99-19, effective with the
Company's second fiscal quarter of 2003, the Company has changed its method
of reporting revenue from these services from a gross basis to a net basis.
The change in reporting, which is reflected in all current and prior
periods, resulted in a reduction in both reported PEO revenues and related
costs of sales, with no effect on the Company's operating results.
Telephone Directory:
Directory Publishing: In the first nine months of fiscal 2004, this revenue
comprised approximately 3% of net consolidated sales. Sales are derived from
the Company's sales of telephone directory advertising for books it
publishes as an independent publisher or for a telephone company in Uruguay.
The Company's employees perform the services and the Company has credit risk
for collecting its billings. Revenue for these services is recognized on a
gross basis in the period the books are printed and delivered.
Ad Production: In the first nine months of fiscal 2004, this revenue
comprised less than 1% of net consolidated sales. Sales are generated when
the Company performs design and production services, and database management
for other publishers' telephone directories. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its ad production work and upon customer acceptance.
Telecommunications Services:
Construction: In the first nine months of fiscal 2004, this revenue
comprised approximately 3% of net consolidated sales. Sales are derived from
the Company supplying aerial and underground construction services related
to telecommunications and cable operations. The Company's employees perform
the services, and the Company takes title to all inventory, and has credit
risk for collecting its billings. The Company relies upon the principles in
Statement of Position 81-1 ("SOP 81-1"), entitled "Accounting for
Performance of Construction-Type Contracts," using the completed-contract
method, to recognize revenue on a gross basis upon customer acceptance of
the project.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
CRITICAL ACCOUNTING POLICIES--Continued
Non-Construction: In the first nine months of fiscal 2004, this revenue
comprised approximately 4% of net consolidated sales. Sales are derived from
the Company performing design, engineering and business systems integrations
work. The Company's employees perform the services and the Company has
credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period in which services are performed,
and if applicable, any completed units are delivered and accepted by the
customer.
Computer Systems:
Database Access: In the first nine months of fiscal 2004, this revenue
comprised less than 3% of net consolidated sales. Sales are derived from the
Company granting access to its proprietary telephone listing databases to
telephone companies, inter-exchange carriers and non-telco enterprise
customers. The Company uses its own databases and has credit risk for
collecting its billings. The Company recognizes revenue on a gross basis in
the period in which the customers access the Company's databases.
IT Maintenance: In the first nine months of fiscal 2004, this revenue
comprised approximately 2% of net consolidated sales. Sales are derived from
the Company providing hardware maintenance services to the general business
community, including customers who have our systems. The Company uses its
own employees and inventory in the performance of the services, and has
credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period in which the services are
performed, contingent upon customer acceptance.
Telephone Systems: In the first nine months of fiscal 2004, this revenue
comprised less than 1% of net consolidated sales. Sales are derived from the
Company providing telephone operator services-related systems and
enhancements to existing systems, equipment and software to customers. The
Company uses its own employees and has credit risk for collecting its
billings. The Company relies upon the principles in Statement of Position
97-2 ("SOP 97-2"), entitled "Software Revenue Recognition" and Emerging
Issues Task Force 00-21 ("EITF 00-21"), entitled "Revenue Arrangements with
Multiple Deliverables" to recognize revenue on a gross basis upon customer
acceptance of each part of the system based upon its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill and Other Intangibles - Under Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill and
other intangibles with indefinite lives are no longer amortized, but are subject
to annual testing using fair value methodology. An impairment charge is
recognized for the amount, if any, by which the carrying value of an intangible
asset exceeds its fair value. In the third quarter of fiscal 2002, the Company
engaged independent valuation firms and since then, on an annual basis, has used
Company personnel to perform such testing. The testing primarily uses comparable
multiples of sales and EBITDA and other valuation methods to assist the Company
in the determination of the fair value of the reporting units measured. Although
the Company believes its estimates are appropriate, the fair value measurements
of the Company's goodwill could be affected by using different estimates and
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
CRITICAL ACCOUNTING POLICIES--Continued
assumptions in these valuation techniques.
Property, Plant and Equipment - Property, plant and equipment is recorded at
cost, and depreciation and amortization are provided on the straight-line and
accelerated methods at rates calculated to depreciate the cost of the assets
over their estimated lives. Intangible assets, other than goodwill, and
property, plant and equipment are reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Under SFAS No. 144, these assets are tested for recoverability whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable. The fair values of the assets are based upon Company estimates of
the discounted cash flows that are expected to result from the use and eventual
disposition of the assets or that amount that would be realized from an
immediate sale. An impairment charge is recognized for the amount, if any, by
which the carrying value of an asset exceeds its fair value. No impairment
charge was recognized in the third quarter of fiscal 2004, as no events or
circumstances indicated the existence of impairment. Although the Company
believes its estimates are appropriate, the fair value measurements of the
Company's long-lived assets could be affected by using different estimates and
assumptions in these valuation techniques.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments.
The Company accounts for the capitalization of software in accordance with AICPA
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Subsequent to the preliminary project
planning and approval stage, all appropriate costs are capitalized until the
point at which the software is ready for its intended use. Subsequent to the
software being used in operations, the capitalized costs are transferred from
costs-in-process to completed property, plant and equipment, and are accounted
for as such. All post-implementation costs, such as maintenance, training and
minor upgrades that do not result in additional functionality, are expensed as
incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $60.0 million and
$70.0 million at August 1, 2004 and November 2, 2003, respectively. Accordingly,
the trade receivables included on the August 1, 2004 and November 2, 2003
balance sheets have been reduced to reflect the $60.0 million and $70.0 million
participation interest sold, respectively. TRFCO has no recourse to the Company
(beyond its interest in the pool of receivables owned by Volt Funding) for any
of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
CRITICAL ACCOUNTING POLICIES--Continued
regulatory factors. The insurance policies have various premium rating plans
that establish the ultimate premium to be paid. Prior to March 31, 2002, the
amount of the additional or return premium was finalized. Subsequent thereto,
adjustments to premiums will be made based upon the level of claims incurred at
a future date up to three years after the end of the respective policy period.
For the policy year ended March 31, 2003, a maximum premium has been
predetermined and accrued. For subsequent policy years, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater than or less
than the established accrual. While management believes that the recorded
amounts are adequate, there can be no assurances that changes to management's
estimates will not occur due to limitations inherent in the estimation process.
In the event it is determined that a smaller or larger accrual is appropriate,
the Company would record a credit or a charge to cost of services in the period
in which such determination is made.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Nine Months Ended Three Months Ended
------------------------- --------------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET SALES: (In thousands)
----------
Staffing Services
Staffing $ 1,150,026 $ 926,849 $ 410,112 $ 327,638
Managed Services (a) 835,850 767,437 306,054 266,584
----------- ----------- ----------- -----------
Total Gross Sales 1,985,876 1,694,286 716,166 594,222
Less: Non-Recourse Managed Services (a) (814,770) (709,803) (298,354) (245,774)
----------- ----------- ----------- -----------
Net Staffing Services 1,171,106 984,483 417,812 348,448
Telephone Directory 49,603 49,743 19,436 22,319
Telecommunications Services 100,445 80,226 37,041 24,736
Computer Systems 80,550 65,559 30,128 23,488
Elimination of intersegment sales (11,049) (8,912) (3,685) (3,833)
----------- ----------- ----------- -----------
Total Net Sales $ 1,390,655 $ 1,171,099 $ 500,732 $ 415,158
=========== =========== =========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES:
-------------------------------------------------------------
SEGMENT OPERATING PROFIT (LOSS):
--------------------------------
Staffing Services $ 22,600 $ 8,577 $ 11,642 $ 5,043
Telephone Directory 6,006 4,584 2,621 4,128
Telecommunications Services (1,655) (1,947) 1,064 (894)
Computer Systems 19,479 9,158 9,090 3,584
----------- ----------- ----------- -----------
Total Segment Operating Profit 46,430 20,372 24,417 11,861
General corporate expenses (22,897) (20,003) (7,704) (7,051)
----------- ----------- ----------- -----------
Total Operating Profit 23,533 369 16,713 4,810
Interest income and other expense (2,381) (1,803) (952) (812)
Foreign exchange loss-net (98) (274) (28) (184)
Interest expense (1,321) (1,678) (441) (480)
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations Before Income Taxes $ 19,733 ($ 3,386) $ 15,292 $ 3,334
=========== =========== =========== ===========
(a) Substantially all of the managed services sales, other than management fees,
are eliminated.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003
EXECUTIVE OVERVIEW
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis is broken
down into these segments. A brief description of these segments and the
predominant source of their sales follow:
STAFFING SERVICES: This segment is divided into three major functional areas and
operates through a network of over 300 Volt Services Group branch offices.
Staffing Solutions fulfills IT and other technical, commercial and industrial
placement requirements of its customers, on both a temporary and permanent
basis, managed staffing, and professional employer organization services.
E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using its Consol web-based
system. Information Technology Solutions provides a wide range of information
technology consulting and project management services through the Company's VMC
Consulting subsidiary.
TELEPHONE DIRECTORY: This segment publishes independent telephone directories,
provides telephone directory production services, database management and
computer-based projects to public utilities and financial institutions.
TELECOMMUNICATIONS SERVICES: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in the
outside plant and central offices of telecommunications and cable companies.
COMPUTER SYSTEMS: This segment provides directory assistance systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
There are several historical seasonal factors that usually affect the sales and
profits of the Company. The Staffing Services segment's sales are always lowest
in the Company's first fiscal quarter due to the Thanksgiving, Christmas and New
Year holidays, as well as certain customer facilities closing for one to two
weeks. During the third and fourth quarters of the fiscal year, this segment
benefits from a reduction of payroll taxes when the annual tax contributions for
higher salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year, and the segment's
Uruguay division publishes directories and produces a major portion of its sales
in the Company's fourth fiscal quarter. In the current year, some of the high
margin DataNational directories usually published in the fourth quarter of
fiscal 2003 were published in the first quarter of the current year.
There are numerous non-seasonal factors impacting sales and profits in the
current nine and three month periods. The sales and profits of the Staffing
Services segment, in addition to the factors noted above, were positively
impacted by a rebound in the country's use of temporary staffing, partially
offset by the continued pressure on margins caused by increases in state payroll
taxes and workers' compensation costs. In addition to the increase in sales, the
profitability of the Staffing segment has benefited by the increased proportion
of the segment's sales from higher margin VMC Consulting subsidiary sales. In
the third quarter of fiscal 2004, the Administrative and Industrial division
recorded its first quarterly operating profit since the fourth quarter of fiscal
2000, but for the nine months, their loss continues to negatively impact the
Staffing segment. The nine-
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
EXECUTIVE OVERVIEW - CONTINUED
month sales and profits of the Telephone Directory segment were positively
affected by an improvement in the ad backlog and the continued positive effects
of its new stringent credit policy, which has reduced bad debts. However, the
third quarter was negatively impacted by the previously announced loss of a
telephone directory production contract in the third quarter of fiscal 2003. In
the third quarter of fiscal 2004, the Telecommunications Services segment
recorded its first quarterly operating profit since the fourth quarter of fiscal
2001. For the nine months of fiscal 2004, even though the sales of the segment
increased, profits were negatively impacted by a change in its product mix and a
material reduction in revenue from the previously profitable Central Office
division. The Company has continued to carefully monitor the overhead within the
segment and reduce headcount in order to mitigate the effect on the reduced
margins throughout the segment. In the third quarter of fiscal 2004, the
Computer Systems segment recorded the highest quarterly operating profit in its
history. The sales and profits of the segment were positively impacted by the
continued increase in the segment's ASP directory assistance outsourcing
business, in which there continues to be a sequential increase in transaction
revenue.
The Company has, and will continue to focus on aggressively increasing its
market share in order to increase profits. All segments have emphasized cost
containment measures, along with improved credit and collections procedures
designed to improve the Company's cash flow. Cash flow, including $18.5 million
from the sale of real estate, enabled the Company to reduce the use of the
Securitization Program by $10.0 million.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its ongoing
compliance with the Sarbanes-Oxley Act, and the standardization and upgrading of
the IT redundancy and business continuity for corporate systems and
communications networks. To the extent possible, the Company has been utilizing,
and will continue to utilize, internal resources to comply with the
Sarbanes-Oxley Act by the end of fiscal year 2005. To-date, outside costs of
compliance with this Act, including software licenses, equipment, consultants
and professional fees amounted to $0.2 million and it is anticipated that a
somewhat larger amount, excluding audit fees, will be expended over the next
twelve months.
VoltDelta Resources LLC, the principal business unit of the Computer Systems
segment, acquired certain assets and liabilities of the directory and operator
services business of Nortel Networks on August 2, 2004 (discussed elsewhere in
this Report). This acquisition will permit VoltDelta to provide the newly
combined customer base with new solutions and an expanded suite of products,
content and enhanced services.
RESULTS OF OPERATIONS - SUMMARY
In the nine-month period of fiscal 2004, consolidated net sales increased by
$219.6 million, or 19%, to $1.4 billion, from the comparable period in fiscal
2003. The increase in fiscal 2004 net sales resulted from increases in three of
the Company's four segments. Staffing Services increased by $186.6 million,
Telecommunications Services increased by $20.2 million, Computer Systems
increased by $15.0 million, while Telephone Directory decreased by $0.1 million.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
RESULTS OF OPERATIONS - SUMMARY - CONTINUED
The net income for the first nine months of fiscal 2004 was $21.5 million
compared to a net loss of $2.1 million in the prior year first nine-month
period. The consolidated results for the nine-month period of fiscal 2004
included income from discontinued operations of $9.5 million (net of taxes of
$4.6 million) from the sale of real estate previously leased to the Company's
former 59% owned subsidiary, Autologic International, Inc.
The Company's nine-month fiscal 2004 income from continuing operations before
income taxes was $19.7 million compared to a loss of $3.4 million in the first
nine months of fiscal 2003. The Company's operating segments reported an
operating profit of $46.4 million for the first nine months of fiscal 2004
compared to $20.4 million in the comparable fiscal 2003 period. Contributing to
the $26.0 million increase were improvements in operating profit reported by the
Staffing Services, Computer Systems, Telephone Directory and Telecommunications
Services segments of $14.0 million, $10.3 million, $1.4 million and $0.3
million, respectively.
General corporate expenses increased by $2.9 million due to costs incurred to
meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communication networks, as well as salary and
professional fee increases.
RESULTS OF OPERATIONS - BY SEGMENT
STAFFING SERVICES
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,150.0 $926.9 $223.1 24.1%
------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $835.9 $767.4 $68.5 9.0%
------------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,171.1 $984.5 $186.6 19.0%
------------------------------------------------------------------------------------------------------------------------
Gross Profit $182.1 15.5% $150.9 15.3% $31.2 20.7%
------------------------------------------------------------------------------------------------------------------------
Overhead $159.5 13.6% $142.3 14.5% ($17.2) (12.1%)
------------------------------------------------------------------------------------------------------------------------
Operating Profit $22.6 1.9% $8.6 0.9% $14.0 163.5%
------------------------------------------------------------------------------------------------------------------------
The sales increase of the Staffing Services segment in the first nine months of
fiscal 2004 from the comparable period in fiscal 2003 was due to increased
traditional staffing business in both the Technical Placement and the
Administrative and Industrial divisions, and the VMC Consulting business of the
Technical Placement division, partially offset by reduced managed service fees.
The increase in operating profit in the segment was derived from the staffing
and managed service operations of the Technical Placement division, including
VMC Consulting, together with reduced losses of the Administrative and
Industrial division.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
STAFFING SERVICES - CONTINUED
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
Technical Placement --------------------- -------------------
Division % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Gross) $1,506.3 $1,321.5 $184.8 14.0%
------------------------------------------------------------------------------------------------------
Sales (Net) $707.9 $617.9 $90.0 14.6%
------------------------------------------------------------------------------------------------------
Gross Profit $121.0 17.1% $101.7 16.5% $19.3 19.0%
------------------------------------------------------------------------------------------------------
Overhead $95.0 13.4% $85.2 13.8% ($9.8) (11.5%)
------------------------------------------------------------------------------------------------------
Operating Profit $26.0 3.7% $16.5 2.7% $9.5 57.3%
------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in the first nine
months of fiscal 2004 from the comparable period in fiscal 2003 was due to a 21%
sales increase with traditional staffing customers, an 11% increase in
ProcureStaff volume due to new accounts and increased business from existing
accounts, and a 46% increase in higher margin VMC Consulting project management
and consulting sales. However, substantially all of the ProcureStaff billings
are deducted in arriving at net sales due to the use of associate vendors who
have contractually agreed to be paid only upon receipt of the customers' payment
to the Company. The increase in net sales was due to the aforementioned increase
in gross sales, along with an increase in the amount of Company recruited
employees fulfilling ProcureStaff assignments. The increase in the operating
profit for the period was the result of the increase in sales, a 0.6 percentage
point improvement in gross margin and a 0.4 percentage point decrease in
overhead costs as related to net sales.
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
Administrative --------------------- -------------------
Industrial Division % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Gross) $479.6 $372.8 $106.8 28.6%
------------------------------------------------------------------------------------------------------
Sales (Net) $463.2 $366.6 $96.6 26.4%
------------------------------------------------------------------------------------------------------
Gross Profit $61.1 13.2% $49.2 13.4% $11.9 24.2%
------------------------------------------------------------------------------------------------------
Overhead $64.5 13.9% $57.1 15.6% ($7.4) (12.9%)
------------------------------------------------------------------------------------------------------
Operating Loss ($3.4) (0.7%) ($7.9) (2.2%) $4.5 57.2%
------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in the
first nine months of fiscal 2004 resulted from both revenue from new accounts
and increased business from existing accounts. The decrease in operating loss
was the result of the aforementioned sales increase, a 1.7 percentage point
decrease in overhead costs as related to net sales, partially offset by a
decrease in gross margin of 0.2 percentage points, due to higher payroll taxes,
increased competition and customers leveraging their buying power by
consolidating the number of vendors with whom they deal.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
TELEPHONE DIRECTORY
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Telephone Directory % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Sales (Net) $49.6 $49.7 ($0.1) (0.3%)
------------------------------------------------------------------------------------------------------
Gross Profit $25.8 52.1% $25.2 50.7% $0.6 2.4%
------------------------------------------------------------------------------------------------------
Overhead $19.8 40.0% $20.6 41.4% $0.8 4.0%
------------------------------------------------------------------------------------------------------
Operating Profit $6.0 12.1% $4.6 9.3% $1.4 31.0%
------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales for the first nine months of fiscal
2004 remained at the same level as in the prior year comparable period. Sales
declined by $7.2 million, or 37%, in the segment's telephone directory
production, printing and other operations, the most significant being a $3.2
million decrease in telephone directory production revenue related to the
previously reported loss of a contract with a telecommunications company in the
third quarter of fiscal 2003 and a $1.5 million decrease in printing revenue in
Uruguay. Significantly offsetting this decline was a $7.1 million, or 24%,
increase in publishing sales primarily due to a change in the publication
schedule of the DataNational operation's community telephone directories and an
increase in advertising revenue. The improvement in operating results was
predominantly the result of the publishing sales increase within the segment,
together with a 1.4 percentage point increase in gross margins, primarily due to
the mix of directories published by DataNational in the period, and a decrease
in overhead of 1.6 percentage points due to reduced bad debt expense. The
Company has incurred $0.7 million of expenses in connection with an
investigation of a failure to comply with certain Company policies at its
operations in Uruguay, and possible litigation against certain former management
personnel at such operations. The operations in Uruguay are not material to the
Company. The investigation has not resulted, and will not result, in any
restatement of any of the Company's financial statements.
TELECOMMUNICATIONS SERVICES
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Telecommunications % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Net) $100.4 $80.2 $20.2 25.2%
------------------------------------------------------------------------------------------------------
Gross Profit $23.4 23.4% $22.8 28.5% $0.6 2.7%
------------------------------------------------------------------------------------------------------
Overhead $25.1 25.0% $24.8 30.9% ($0.3) (1.3%)
------------------------------------------------------------------------------------------------------
Operating Loss ($1.7) (1.7%) ($1.9) (2.4%) $0.2 15.0%
------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the first nine
months of fiscal 2004 was due to increased business in the Business Systems and
Construction and Engineering divisions, partially offset by a decrease in the
Central Office division. The decrease in operating loss was due to the sales
increase, a decrease
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
TELECOMMUNICATIONS SERVICES - CONTINUED
in overhead as a percentage of net sales of 5.9 percentage points (net of a
previously reported $1.3 million non-recurring charge in the first quarter
related to a domestic consulting contract for services), partially offset by a
5.1 percentage point decrease in gross margins. Despite an emphasis on cost
controls, the results of the segment continue to be affected by the decline in
capital spending by telephone companies caused by the depressed conditions
within the segment's telecommunications industry customer base. This factor has
also increased competition for available work, pressuring pricing and gross
margins throughout the segment. The division most affected by reduced sales and
margins was Central Office, whose sales and margins decreased by 44% and 21.4
percentage points, respectively. Sales in the Construction and Engineering
division of the segment, increased by 21% over the prior year while margins
decreased by 2.4 percentage points. The increase in sales was attributable to
the completion of several long-term contracts. Sales in the Business Systems
division increased by 80% while margins decreased by 6.7 percentage points.
Recent actions by major long-distance telephone companies regarding local
residential service could also negatively impact both sales and margins of the
Business Systems division.
COMPUTER SYSTEMS
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Computer Systems % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Net) $80.6 $65.6 $15.0 22.9%
------------------------------------------------------------------------------------------------------
Gross Profit $48.1 59.8% $33.4 51.0% $14.7 44.1%
------------------------------------------------------------------------------------------------------
Overhead $28.7 35.6% $24.3 37.0% ($4.4) (18.2%)
------------------------------------------------------------------------------------------------------
Operating Profit $19.5 24.2% $9.2 14.0% $10.3 112.7%
------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first nine months of fiscal
2004 was due to improvements in the segment's operator services business,
including ASP directory assistance, which reflected a 41% growth in sales during
the period, a sales increase of 149% in DataServ's directory assistance services
which are provided to non-telco enterprise customers, a 7% sales growth in the
Maintech division's IT maintenance services, partially offset by a decrease in
product revenue recognized of 25%. The growth in operating profit from the
comparable period of the previous year was the result of the increase in sales,
an increase in gross margins of 8.8 percentage points, partially due to $1.2
million for the settlement of a vendor dispute and vendor refunds related to
prior periods, together with an overhead decrease of 1.4 percentage points as
related to sales.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE NINE MONTHS ENDED AUGUST 3, 2003--Continued
RESULTS OF OPERATIONS - OTHER
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Other % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Selling & Administrative $57.6 4.1% $53.2 4.5% ($4.4) (8.4%)
------------------------------------------------------------------------------------------------------
Depreciation & Amortization $18.8 1.4% $17.8 1.5% ($1.0) (6.1%)
------------------------------------------------------------------------------------------------------
Interest Income $0.7 -- $0.6 -- $0.1 11.2%
------------------------------------------------------------------------------------------------------
Other Expense ($3.1) 0.2% ($2.4) 0.2% ($0.7) (26.7%)
------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.1) -- ($0.3) -- $0.2 64.2%
------------------------------------------------------------------------------------------------------
Interest Expense ($1.3) 0.1% ($1.7) 0.1% $0.4 21.3%
------------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the nine-month periods were:
The increase in selling and administrative expenses in the first nine-months of
fiscal 2004 from the comparable period was a result of increased corporate
general and administrative expenses related to costs to meet the disaster
recovery requirements of redundancy and business continuity for corporate
systems and communications networks, as well as salary and professional fee
increases. Theses increases were partially offset by decreases in bad debt
expenses.
The increase in depreciation and amortization for the first nine months of
fiscal 2004 from the comparable period was attributable to an increase in fixed
assets, primarily in the Staffing Services and Computer Systems segments.
The Other Expense in the first nine months of both fiscal years is primarily the
charges related to the Company's Securitization Program, as well as sundry
expenses.
The decrease in interest expense in the first nine months of fiscal 2004 from
the comparable period was the result of lower borrowing levels and interest
rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 39.3% in the first nine months of fiscal 2004 compared
to an effective tax rate benefit of 37.3% in the comparable period of fiscal
2003. In fiscal 2003, the effective tax rate benefit was lower due to foreign
losses for which no tax benefit was provided.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE THREE MONTHS ENDED AUGUST 3, 2003
RESULTS OF OPERATIONS - SUMMARY
In the third quarter of fiscal 2004, consolidated net sales increased by $85.6
million, or 21%, to $500.7 million from the comparable period in fiscal 2003.
The increase in sales for the quarter from the comparable prior year quarter
resulted from increases in three of the Company's four segments. Staffing
Services increased by $69.4 million, Telecommunications Services increased by
$12.3 million and Computer Systems increased by $6.6 million, partially offset
by a decrease of $2.9 million in the Telephone Directory segment.
The Company's net income was $9.2 million in the third quarter of fiscal 2004
compared to $2.1 million in the third quarter of 2003.
The Company's operating segments reported an operating profit of $24.4 million
in the third quarter of fiscal 2004, an increase of $12.6 million over the
fiscal 2003 third quarter. Contributing to the increase were improvements in
Staffing Services of $6.6 million, Computer Systems of $5.5 million,
Telecommunications Services of $2.0 million, partially offset by a decrease of
$1.5 million in the Telephone Directory segment.
General corporate expenses increased by $0.7 million due to costs incurred to
meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communication networks and salary increases.
RESULTS OF OPERATIONS - BY SEGMENT
STAFFING SERVICES
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Staffing Services % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $410.1 $327.7 $82.4 25.2%
-------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $306.1 $266.5 $39.6 14.8%
-------------------------------------------------------------------------------------------------------
Sales (Net) $417.8 $348.4 $69.4 19.9%
-------------------------------------------------------------------------------------------------------
Gross Profit $67.2 16.1% $52.7 15.1% $14.5 27.5%
-------------------------------------------------------------------------------------------------------
Overhead $55.6 13.3% $47.7 13.7% ($7.9) (16.5%)
-------------------------------------------------------------------------------------------------------
Operating Profit $11.6 2.8% $5.0 1.4% $6.6 130.9%
-------------------------------------------------------------------------------------------------------
The sales increase of the Staffing Services segment in the third quarter of
fiscal 2004 from the comparable period in fiscal 2003 was due to increased
traditional staffing business in both the Technical Placement and the
Administrative and Industrial divisions, and the VMC Consulting business of the
Technical Placement division, partially offset by reduced managed service fees.
The increase in operating profit in the segment was derived from the traditional
and managed service operations of the Technical Placement division, including
VMC Consulting, together with a return to profitability of the Administrative
and Industrial division.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE THREE MONTHS ENDED AUGUST 3, 2003--Continued
STAFFING SERVICES - CONTINUED
Nine Months Ended
---------------------------------------------
Technical Placement August 1, 2004 August 3, 2003
-------------------------- --------------------- -------------------
Division % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Sales (Gross) $543.6 $462.4 $81.2 17.6%
------------------------------------------------------------------------------------------------------
Sales (Net) $251.4 $219.4 $32.0 14.6%
------------------------------------------------------------------------------------------------------
Gross Profit $44.4 17.7% $36.3 16.5% $8.1 22.6%
------------------------------------------------------------------------------------------------------
Overhead $33.4 13.3% $29.2 13.3% ($4.2) (14.6%)
------------------------------------------------------------------------------------------------------
Operating Profit $11.0 4.4% $7.1 3.2% $3.9 55.6%
------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in the third quarter
of fiscal 2004 from the comparable period in fiscal 2003 was due to a 22% sales
increase with staffing customers, a 15% increase in ProcureStaff volume due to
new accounts and increased business from existing accounts, and a 42% increase
in the higher margin VMC Consulting project management and consulting sales.
However, substantially all of the ProcureStaff billings are deducted in arriving
at net sales due to the use of associate vendors who have contractually agreed
to be paid only upon receipt of the customers' payment to the Company. The
increase in net sales was due to the aforementioned increase in gross sales,
along with an increase in the amount of Company recruited employees fulfilling
ProcureStaff assignments. The increase in the operating profit for the period
was the result of the increase in sales and a 1.2 percentage point improvement
in gross margin due to increased sales in higher margin recruited placements and
project management and consulting divisions.
Nine Months Ended
---------------------------------------------
Administrative & August 1, 2004 August 3, 2003
-------------------------- --------------------- -------------------
Industrial Division % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Sales (Gross) $172.6 $131.8 $40.8 30.9%
------------------------------------------------------------------------------------------------------
Sales (Net) $166.4 $129.0 $37.4 29.0%
------------------------------------------------------------------------------------------------------
Gross Profit $22.8 13.7% $16.5 12.8% $6.3 38.0%
------------------------------------------------------------------------------------------------------
Overhead $22.2 13.3% $18.5 14.4% ($3.7) (19.5%)
------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $0.6 0.4% ($2.0) (1.5%) $2.6 131.0%
------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in the
third quarter of fiscal 2004 resulted from both revenue from new accounts and
increased business from existing accounts. The division's return to
profitability was the result of the aforementioned sales increase, a 1.1
percentage point decrease in overhead costs as related to net sales and an
increase in gross margin of 0.9 percentage points. The increase in gross margin
was due to an increase in permanent placement sales and to higher mark-ups
partially offset by higher payroll taxes. A continued increase in profit level
of the Administrative and Industrial division depends on the timing and strength
of an increase towards previous usage levels of alternative staffing by American
industry. In addition, high unemployment and the need for state and local
governments to align their revenues with expenditures will result in continued
pressure on margins unless and until jurisdictions decrease payroll and various
other taxes.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE THREE MONTHS ENDED AUGUST 3, 2003--Continued
TELEPHONE DIRECTORY
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Telephone Directory % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Net) $19.4 $22.3 ($2.9) (12.9%)
------------------------------------------------------------------------------------------------------
Gross Profit $10.9 56.1% $12.7 57.0% ($1.8) (14.3%)
------------------------------------------------------------------------------------------------------
Overhead $8.3 42.6% $8.6 38.6% $0.3 3.7%
------------------------------------------------------------------------------------------------------
Operating Profit $2.6 13.5% $4.1 18.4% ($1.5) (36.5%)
------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales decrease in the third quarter of
fiscal 2004 was due primarily to a sales decline of $3.7 million in the
segment's telephone directory production, printing and other operations. The
most significant reduction was a $1.5 million decrease in telephone directory
production revenue related to the previously reported loss of a contract with a
telecommunications company in the third quarter of fiscal 2003 and a $1.6
million sales decrease in the Uruguayan printing operation. The decrease in
operating profit was predominantly the result of the sales decrease within the
segment, along with a reduction in gross margin of 0.9 percentage points. The
reduced profitability of these two divisions was partially offset by a $1.4
million increase in the operating profit of DataNational, the publisher of
community directories. The Company has incurred $0.7 million of expenses in
connection with an investigation of a failure to comply with certain Company
policies at its operations in Uruguay, and possible litigation against certain
former management personnel at such operations. The operations in Uruguay are
not material to the Company. The investigation has not resulted, and will not
result, in any restatement of any of the Company's financial statements.
TELECOMMUNICATIONS SERVICES
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Telecommunications % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Net) $37.0 $24.7 $12.3 49.8%
------------------------------------------------------------------------------------------------------
Gross Profit $8.3 22.5% $7.0 28.3% $1.3 18.9%
------------------------------------------------------------------------------------------------------
Overhead $7.3 19.6% $7.9 31.9% $0.6 8.1%
------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $1.0 2.9% ($0.9) (3.6%) $1.9 219.0%
------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the third quarter of
fiscal 2004 was due to increased business in the Business Systems and
Construction and Engineering divisions, partially offset by a decrease in the
Central Office division. The segment's return to profitability was due to the
sales increase, a 12.3 percentage point decrease in overhead as a percentage of
net sales, partially offset by a decrease in gross
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE THREE MONTHS ENDED AUGUST 3, 2003--Continued
-
TELECOMMUNICATIONS SERVICES - CONTINUED
margin of 5.8 percentage points. Despite an emphasis on cost controls, the
results of the segment continue to be affected by the decline in capital
spending by telephone companies caused by the depressed conditions within the
segment's telecommunications industry customer base. This factor has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment. The division most affected by reduced sales and margins
was Central Office, whose sales and margins decreased by 55% and 34.7 percentage
points, respectively. Sales in the Construction and Engineering division of the
segment, increased by 72% over the prior year quarter and the gross margin
increased slightly. The increase in sales was attributable to the completion of
several long-term contracts. While sales in the Business Systems division
increased by 86%, its margins decreased by 6.7 percentage points. Recent
announcements by major long-distance telephone companies regarding local
residential service could negatively impact both sales and margins of the
Business Systems division.
COMPUTER SYSTEMS
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Computer Systems % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Sales (Net) $30.1 $23.5 $6.6 28.3%
------------------------------------------------------------------------------------------------------
Gross Profit $19.6 65.0% $12.7 54.3% $6.9 53.7%
------------------------------------------------------------------------------------------------------
Overhead $10.5 34.9% $9.2 39.3% ($1.3) (14.6%)
------------------------------------------------------------------------------------------------------
Operating Profit $9.1 30.2% $3.6 15.4% $5.5 153.6%
------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the third quarter of fiscal
2004 was due to improvements in the segment's operator services business,
including ASP directory assistance, which reflected a 50% growth in sales during
the period compared to last year's third quarter, a sales increase of 81% in
DataServ's directory assistance services which are provided to non-telco
enterprise customers, a 6% sales growth in the Maintech division's IT
maintenance services, and an increase in product revenue recognized of 22%. The
growth in operating profit from the comparable period of the previous year was
the result of the increase in sales, an increase in gross margins of 10.7
percentage points, partially due to $1.2 million for the settlement of a vendor
dispute and vendor refunds related to prior periods, together with a 4.4
percentage point decrease in overhead as a percentage of sales.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 1, 2004 COMPARED
TO THE THREE MONTHS ENDED AUGUST 3, 2003--Continued
RESULTS OF OPERATIONS - OTHER
Other items, discussed on a consolidated basis, affecting the results of
operations for the three-month periods were:
Nine Months Ended
---------------------------------------------
August 1, 2004 August 3, 2003
--------------------- -------------------
Other % of % of Favorable Favorable
-------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------
Selling & Administrative $20.6 4.1% $19.5 4.7% $1.1 5.7%
------------------------------------------------------------------------------------------------------
Depreciation & Amortization $6.5 1.3% $6.1 1.5% ($0.4) (5.6%)
------------------------------------------------------------------------------------------------------
Interest Income $0.3 -- $0.1 - $0.2 87.4%
------------------------------------------------------------------------------------------------------
Other Expense ($1.2) 0.2% ($0.9) 0.2% $0.3 27.1%
------------------------------------------------------------------------------------------------------
Foreign Exchange Loss -- -- ($0.2) - $0.2 84.8%
------------------------------------------------------------------------------------------------------
Interest Expense ($0.4) 0.1% ($0.5) 0.1% $0.1 8.1%
------------------------------------------------------------------------------------------------------
The increase in selling and administrative expenses in the third quarter of
fiscal 2004 from the comparable period was a result of increased corporate
general and administrative expenses related to costs to meet the disaster
recovery requirements of redundancy and business continuity for corporate
systems and communications networks, as well as salary and professional fee
increases. These increases were partially offset by decreases in bad debt
expenses.
The increase in depreciation and amortization in the third quarter of fiscal
2004 from the comparable period was attributable to an increase in fixed assets,
primarily in the Staffing Services and Computer Systems segments.
Other Expense in the third quarter of each fiscal year is primarily the charges
related to the Company's Securitization Program, as well as sundry expenses.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 39.6% in the third quarter of fiscal 2004 compared to
36.7% in fiscal 2003. In fiscal 2004, the effective tax rate was higher due to
increased foreign and state taxes.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech clients of $34.5 million and $18.9 million at August
1, 2004 and November 2, 2003, respectively, increased by $6.7 million to $68.7
million in the nine months ended August 1, 2004. Unrestricted cash and cash
equivalents decreased to $34.3 million at August 1, 2004 from $43.2 million at
November 2, 2003 resulting from increased working capital requirements.
Operating activities provided $8.1 million of cash in the first nine months of
fiscal 2004 compared to providing $28.7 million in the first nine months of
fiscal 2003.
Operating activities in the first nine months of fiscal 2004, exclusive of
changes in operating assets and liabilities, produced $29.9 million of cash as
the Company's income from continuing operations of $12.0 million included
non-cash charges primarily for depreciation and amortization of $18.8 million,
accounts receivable provisions of $3.8 million and a deferred income tax benefit
of $4.5 million. In the first nine months of fiscal 2003, operating activities,
exclusive of changes in operating assets and liabilities, produced $18.3 million
of cash, as the Company's net loss of $2.1 million included non-cash charges
primarily for depreciation and amortization of $17.8 million and accounts
receivable provisions of $4.3 million.
Changes in operating assets and liabilities in the first nine months of
fiscal 2004 used $21.8 million of cash primarily due to a $57.4 million increase
in the level of accounts receivable and a $10.0 million reduction in the
participation interest sold under the Company's Securitization Program,
partially offset by an increase in the level of accounts payable and accrued
expenses of $29.5 million, an increase in deferred income and other liabilities
of $6.9 million, a decrease in the level of inventories of $5.5 million and an
increase in taxes payable of $3.4 million. The increase in the level of accounts
receivable, accounts payable and other operating liabilities were the result of
increased business in the first nine months of fiscal 2004. Including
non-recourse managed service billings which are excluded from net sales, the
days sales outstanding of accounts receivable at August 1, 2004 remained the
same as at November 2, 2003. In the first nine months of fiscal 2003, changes in
operating assets and liabilities produced $10.4 million of cash, principally due
to cash provided by increases in deferred income and other liabilities of $11.0
million and proceeds from the Securitization Program of $10.0 million, partially
offset by $11.8 million increase in the level of accounts receivable.
The principal factors in the $5.5 million of cash applied to investing
activities in the first nine months of fiscal 2004 were the $24.3 million in
expenditures for property, plant and equipment offset by $18.5 million in
proceeds from the sale of real estate, previously leased to the Company's former
59%-owned subsidiary. The principal factor in the $13.2 million of cash applied
to investing activities for the first nine months of fiscal 2003 was
expenditures of $13.5 million for property, plant and equipment. The increase in
expenditures for property, plant and equipment primarily resulted from the
Computer Systems' ASP business.
The principal factors in the $3.7 million of cash provided by financing
activities in the first nine months of fiscal 2004 was a $3.5 million increase
in notes payable to banks, primarily due to borrowings under the Company's
revolving credit agreement (see below). Cash applied to financing activities in
the first nine months of fiscal 2003 resulted from the $1.4 million payment of
long-term debt, partially offset by a $0.9 million increase in bank loans.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
COMMITMENTS
In fiscal 2000, the Company began development of a web-enabled front-end system
designed to improve efficiency and connectivity in the recruiting, assignment,
customer maintenance and other functions in the branch offices of the Staffing
Services segment. The total costs to develop and install this system are
currently anticipated to be approximately $12.0 million, of which approximately
$9.8 million has been incurred and capitalized to-date. The system is expected
to be completely installed in early fiscal 2005.
The Company's Computer Systems segment anticipates spending approximately $4.0
million during the remainder of fiscal year 2004 to furnish systems and
equipment to customers and provide enhanced directory assistance and other
information services as a transaction-based ASP service, charging a fee per
transaction. The Company has no other material capital commitments.
There has been no material change through August 1, 2004 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended November
2, 2003.
OFF-BALANCE SHEET FINANCING
The Company has no off-balance sheet financing arrangements, as that term is
used in Item 303(a)(4) of Regulation S-K.
SECURITIZATION PROGRAM
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). In April
2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under the Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries are sold from time-to-time by the
Company to Volt Funding Corp., a wholly owned special purpose subsidiary of the
Company ("Volt Funding"). Volt Funding, in turn, sells to Three Rivers Funding
Corporation ("TRFCO"), an asset backed commercial paper conduit sponsored by
Mellon Bank, N.A. and unaffiliated with the Company, an undivided percentage
ownership interest in the pool of receivables Volt Funding acquires from the
Company (subject to a maximum purchase by TRFCO in the aggregate of $150.0
million). The Company retains the servicing responsibility for the accounts
receivable. At August 14, 2004, TRFCO had purchased from Volt Funding a
participation interest of $60.0 million out of a pool of approximately $229.5
million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
SECURITIZATION PROGRAM--Continued
Funding, to satisfy the Company's creditors. TRFCO has no recourse to the
Company (beyond its interest in the pool of receivables owned by Volt Funding)
for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts on TRFCO's
commercial paper, are charged to the consolidated statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
August 1, 2004, the Company was in compliance with all requirements of the
Securitization Program and believes it will remain in compliance throughout the
remainder of the fiscal year.
CREDIT LINES
In April 2004, the Company amended its $40.0 million secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days and reduce the line
to $30.0 million, as a result of the increase in its Securitization Program
(discussed above). Additionally, in July 2004, this program was further amended
to release Volt Delta Resources, LLC as a guarantor and collateral grantor under
the Credit Agreement due to the previously announced agreement between Volt
Delta Resources, LLC and Nortel Networks, Inc. At August 1, 2004, the Company
had credit lines with domestic and foreign banks that provide for borrowings and
letters of credit up to an aggregate of $41.5 million, including $30.0 million
under a secured, syndicated revolving credit agreement, which will expire in
April 2005.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent arranger for the secured
Credit Facility is JP Morgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, NA, Wells Fargo, N. A. and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
August 1, 2004, $26.6 million was available under the borrowing base. Borrowings
under the Credit Facility are to bear interest at various rate options selected
by the Company at the time of each borrowing. Certain rate options, together
with a facility fee, are based on a leverage ratio, as defined.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
CREDIT LINES--Continued
Additionally, interest and the facility fees can be increased or decreased upon
a change in the Company's long-term rating debt rating provided by a nationally
recognized rating agency. Based upon the Company's leverage ratio and debt at
August 1, 2004, if a three-month LIBO rate was the interest rate option selected
by the Company, borrowings would have borne interest at the rate of 2.3% per
annum. At August 1, 2004, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million; a
limitation on cash dividends, capital stock repurchases and redemptions by the
Company in any one fiscal year to 50% of consolidated net income, as defined,
for the prior fiscal year; and a requirement that the Company maintain a ratio
of EBIT, as defined, to interest expense, as defined, of 1.25 to 1.0 for the
twelve months ending as of the last day of each fiscal quarter. The Credit
Agreement also imposes limitations on, among other things, the incurrence of
additional indebtedness, the incurrence of additional liens, sales of assets,
the level of annual capital expenditures, and the amount of investments,
including business acquisitions and investments in joint ventures, and loans
that may be made by the Company and its subsidiaries. At August 1, 2004, the
Company was in compliance with all covenants in the Credit Agreement and
believes it will remain in compliance throughout the remainder of the fiscal
year.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At August 1, 2004, five of those guarantors have pledged approximately $49.3
million of accounts receivable, other than those in the Securitization Program,
as collateral for the guarantee obligations. Under certain circumstances, other
subsidiaries of the Company also may be required to become guarantors under the
Credit Facility. At August 1, 2004, the Company had borrowed 2.0 million British
pounds ($3.6 million) under this facility.
SUMMARY
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program are sufficient to fund its presently contemplated
operations and satisfy its debt obligations through the remainder of fiscal 2004
and fiscal year 2005.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NEW ACCOUNTING PRONOUNCEMENTS TO BE EFFECTIVE IN FISCAL 2004
In December 2003, the FASB revised FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which provides new guidance with respect
to the consolidation of all previously unconsolidated entities, including
special purpose entities. The Company has no unconsolidated subsidiaries. The
provisions of FIN 46 that were adopted by the Company through August 1, 2004 did
not have an impact on the Company's consolidated financial position and results
of operations.
RELATED PARTY TRANSACTIONS
During the first nine months of fiscal 2004, the Company paid or accrued $1.5
million to the law firm of which Lloyd Frank, a director, is of counsel,
primarily for services rendered and expenses reimbursed, including $0.7 million
related to the transaction with Nortel Networks Inc. discussed elsewhere in this
Report.
The Company rents approximately 2,600 square feet (previously 2,500 square feet)
of office space to a corporation owned by Steven A. Shaw, an officer and
director, in the Company's El Segundo, California facility, which the Company
does not require for its own use, on a month-to-month basis at a rental of
$1,750 per month (previously $1,500 per month), effective March 1, 2004. Based
on the nature of the premises and a recent market survey conducted for the
Company, the Company believes the rent is the fair market rental for such space.
43
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company's earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would decrease its
annual net interest expense and securitization costs by $10,000 and $4,000,
respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $14.9 million
at August 1, 2004. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At August 1, 2004, the total market value of these
investments was $4.2 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the values of foreign
currencies fluctuate against the dollar, which may impact reported earnings. As
of August 1, 2004, the total of the Company's net investment in foreign
operations was $7.2 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
August 1, 2004, the total of the Company's foreign exchange contracts was $4.4
million, leaving a balance of net foreign assets exposed of $2.8 million. The
amount of risk and the use of foreign exchange instruments described above are
not material to the Company's financial position or results of operations and
the Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening or strengthening of the U.S. dollar against these currencies at August
1, 2004 by 10% would result in a pretax gain or loss of $0.7 million and $0.5
million, respectively, related to these positions.
44
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at August 1, 2004.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
INTEREST RATE MARKET RISK PAYMENTS BY EXPECTED MATURITY DATES AS OF AUGUST 1, 2004
------------------------- --------------------------------------------------------
Less than 1-3 3-5 After 5
TOTAL 1 YEAR YEARS YEARS YEARS
------- --------- ------ ------ ------
(Dollars in thousands of US$)
CASH AND CASH EQUIVALENTS
Money Market and Cash Accounts $68,736 $68,736
Weighted Average Interest Rate 0.98% 0.98%
-------- -------
Total Cash & Cash Equivalents $68,736 $68,736
======== =======
SECURITIZATION PROGRAM
Accounts Receivable Securitization $60,000 $60,000
Finance Rate 1.9% 1.9%
-------- -------
Securitization Program $60,000 $60,000
======== =======
DEBT
Term Loan $14,193 $394 $892 $1,050 $11,857
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $7,717 $7,717
Weighted Average Interest Rate 6.5% 6.5% -- -- --
-------- ------- -------- ------ ------
Total Debt $21,910 $8,111 $892 $1,050 $11,587
======== ======= ======== ====== =======
45
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
FOREIGN EXCHANGE MARKET RISK CONTRACT VALUES
Less than
TOTAL 1 YEAR FAIR VALUE (1)
------- --------- --------------
(Dollars in thousands of US $)
OPTION CONTRACTS
Euro to British Pounds Sterling $1,415 $1,415 $20
Contractual Exchange Rate 0.67 0.67
British Pounds Sterling to U.S.$ $903 $903 16
Contractual Exchange Rate 1.81 1.81
Canadian $ to U.S.$ $2,067 $2,067 29
---
Contractual Exchange Rate 1.45 1.45
------ ------
Total Exchange Contracts $4,385 $4,385 $65
====== ====== ===
(1) Represents the fair value of the foreign contracts at August 1, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation of the effectiveness of the design and
operation of its "disclosure controls and procedures," as defined in, and
pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of
August 1, 2004 under the supervision and with the participation of the
Company's management, including the Company's Chairman of the Board,
President and Principal Executive Officer and its Senior Vice President and
Principal Financial Officer. Based on that evaluation, the Company's
Chairman of the Board, President and Principal Executive Officer and its
Senior Vice President and Principal Financial Officer concluded that, as of
the date of their evaluation, the Company's disclosure controls and
procedures were effective to ensure that material information relating to
the Company and its subsidiaries is made known to them on a timely basis.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
46
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT DESCRIPTION
15.01 Report of Independent Registered Public Accounting Firm
15.02 Acknowledgement of Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
BY: /S/ JACK EGAN
--------------------------
Date: September 14, 2004 JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
47
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
15.01 Report of Independent Registered Public Accounting Firm
15.02 Acknowledgement of Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002